What Are ELSS Funds? How Do They Work?

As the new financial year begins, you may be looking for financial securities to invest in. You can consider put your money on ELSS as it will not only allow you to earn high returns when compared to government schemes like PPF, but is comparatively short termed and comes with tax benefits under section 80C.

What is a ELSS?

ELSS or Equity Linked Savings Scheme is a type of mutual fund that was created by the government of India to encourage more people to invest in equity markets by providing tax benefits on them. These are mutual funds that focus on investing money on equity and equity-related securities. They help investors generate wealth over the long term.

These come with a lock-in period of three years.

How can you invest in ELSS?

You can invest in ELSS through any mutual fund house of your choice. One can either do this with a lump sum amount or through systematic investment plans (SIP).

The SIP method is ideal if you are looking for an investment scheme that allows you to put aside a certain amount every month as savings. Further, SIP allows you to break up your tax claims on deposits made every year and it also gives you the benefit of rupee-cost averaging that allows purchases at the best possible price.

What are the tax implications on ELSS?

Deposits made towards ELSS are eligible for tax rebate under section 80C of the Income Tax Act.

The returns are however taxable as long term capital gains at the rate of 10 percent.

While there is no cap on how much can be invested in ELSS, the tax exemption is subject to the limitation on tax rebate under section 80C as per tax slab.

Benefits

• If you compare it to other savings instruments that are eligible for tax rebates under section 80C, like NSC, PPF, and 5-year bank FD, ELSS has the shortest lock-in period with a potential to give the highest returns.
• Moreover, these funds are taken care of by the experts at the mutual fund houses that are actively monitoring the movement and diversifying the fund by investing in various company equities. The investor simply has to make sure that the monthly installment towards towards the SIP is made.
• It is safer than directly investing in a company's equity which requires monitoring. The diversification of funds by your fund manager will help curb the risks associated with equity investments.
• Among mutual fund schemes, ELSS is considered as the best wealth generator.
• You can start investing in an SIP for as low as Rs 500 per month.
• You can track the performance of your fund and if you are not satisfied, shift to another fund manager or another fund.
• You can also diversify your ELSS investment by choosing two or more fund houses for investment rather than one.

 

Note

ELSS returns are market linked. There are no assured returns like in a fixed deposit and it is based on the performance of the market and how well your fund manager picks stocks.

While you can track the net asset value of your ELSS from time to time, do not make hasty decisions of selling or withdrawing from the scheme during temporary market corrections.